Tax-Assisted Approaches for Helping Canadians Meet Out-of-Pocket Health-Care Costs

Abstract

Canadians are not saving for the inevitable costs of drugs and long-term care which they will have to pay for out of pocket in their old age, and these costs could potentially be financially devastating for them. Later in life, when out-of-pocket health-care costs mount, those who previously enjoyed the security of a workplace insurance plan to cover such expenses will face a grim financial reality. Many aspects of care for older Canadians aren’t covered by this country’s single-payer health-care system. Besides prescription drugs, these include management of chronic conditions by ancillary health professionals, home care, long-term care, and dental and vision care. Statistics show that in 2012, Canadians’ private spending on health care totaled $60 billion, with private health insurance covering $24.5 billion of that amount. Coverage of health-care costs that don’t fall under Medicare’s purview is at present rather piecemeal. The non-refundable federal Medical Expense Tax Credit covers expenses only after the three-per-cent minimum, or first $2,171, of out-of-pocket costs have been paid by the individual. The Disability Tax Credit is available to those with a certified chronic disability, and these individuals are eligible for further support via the Registered Disability Savings Plan. A Caregiver Tax Credit is also available. The federal government has a golden opportunity to provide an incentive for Canadians to set aside money to pay not only for the often catastrophic medical and drug costs that can come with aging, but also to save so they can afford long-term care, or purchase private health insurance. Too many Canadians, unfortunately, believe that the federal government picks up the tab for long-term care. In fact, provincial subsidies are provided on a means-testing basis, thus leaving many better-off Canadians in the lurch when they can no longer live alone and must make the transition to long-term care. Providing more generous tax treatment of current and future out-of-pocket health costs, including insurance premiums, is an obvious way for the federal government to support Canadians to meet their health care needs and improve their well-being. Two existing vehicles can play an essential part of this plan. The government can change the currently non-refundable Medical Expenses Tax Credit and the refundable Medical Expenses Supplement so that out-ofpocket health-care costs are eligible from the first dollar. This would place no added burden on government if the exemption of employer-provided health benefits from employees’ taxable income were removed. Making an altered METC available to Canadians who pay their out-of-pocket costs from a registered health savings vehicle, which could be created within an RRSP to avoid extra administrative burdens, would provide them with an incentive to save. They could then either self-insure for future out-of-pocket health costs, or purchase private health insurance. A grant component could be added for lower-income families to make such savings incentives more widely diffuse. Treating health benefits as taxable income subject to the modified Medical Expenses Tax Credit would address efficiency and equity issues with the existing tax treatments of health-care costs while extending tax assistance for out-of-pocket costs to more of the population. When the onus for decision making about payments and insurance purchases is placed on consumers, cost containment in health care and quality improvement incentives naturally follow.